THE OECD has again cut its growth forecast for Australia and says more interest rate cuts will be needed if there is a marked slowdown in the Chinese economy.
In its latest economic outlook released in Paris overnight, the OECD forecasts Australian economic growth of 2.6 per cent in 2013.
This is a downgrade on the forecast of three per cent made six months ago, a further adjustment down from a previous outlook six months before that of 3.7 per cent.
“The surge in mining investment, which is likely to peak in 2013, is gradually losing it stimulatory effect on activity, while new drivers of growth are taking time to emerge,” the OECD said.
A hoped-for upturn in the non-mining economy remains subdued due to the persistently high Australian dollar exchange rate, which is weighing on companies confidence and investment, despite lower interest rates.
However, the Paris-based global institution expects the 2013 growth slowdown to be temporary. It is sticking to an expectation for activity to pick up to around trend growth of 3.2 per cent in 2014.
It also expects lower interest rates and an improving external environment will gradually encourage investment in the non-mining sector, after adaptations to a higher exchange rate.
“In addition, exports of mining products will continue to benefit from increased capacity in that sector,” it said.
But a marked slowdown in China would weigh on exports and Australia’s terms of trade, which could hasten the slowdown in mining investment and increase the need for more official rate cuts.
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Another key risk is the uncertainty surrounding the pace of the consolidation of the federal budget, although this should be clarified after the September election.
However, the OECD welcomed the Labor government’s decision to adopt a more gradual approach to reducing the budget deficit, caused by lower-than-expected tax revenue, as the economy continues to transition.
“The authorities have quite rightly, therefore, decided to give free rein to the automatic stabilisers, with the elimination of the federal deficit postponed probably until 2015/16,” it said.
“If activity worsens significantly, the authorities should not hesitate to ease fiscal policy so as to bolster demand.”
